Default possibility mentioned as ‘political instability’ is cited.

The credit rating of $13 million worth of Tulare Regional Medical Center’s bonds was reduced for the second time in a month.

The Fitch rating agency said on Sept. 6 the new rating, CC (“very high levels of credit risk”), indicated it believes the hospital is probably at risk of default.

It cited the hospital’s continuing struggle to generate enough cash to pay its bills and obligations and what it called “continuing delays in executing external liquidity agreements to bolster working capital.”

It said failure to “restore liquidity” by the end of September “will result in further negative rating action.”

It linked that to “heightened political instability at the TRMC board level” as well as what Fitch called “fractured governance.”

It said what it called a “breakdown in communication between the hospital board and the private corporation that manages its operations, Healthcare Conglomerate Associates, “places risk on hospital operations and execution of credit agreements.”

“Resolution of the rating watch negative requires clarity over the legality of TRMC board and hospital administration actions and development of a working relationship between the TRMC board and hospital administration to support TRMC operations, reporting and financing activities.

“Fitch is concerned about receipt of timely and reliable information. Maintenance of the Fitch rating is dependent on management’s ability to provide timely and reliable information.”

The hospital’s board has not met since June.

A recall election July 11 ousted longtime board member Dr. Parmod Kumar. The person elected to take his place, Senovia Guiterrez, is a critic of HCCA and its CEO, Dr. Yorai (Benny) Benzeevi, and would swing the board majority from pro- to anti-HCCA.

But when the five-member board met July 26, chairman Linda Wilbourn refused to let Guiterrez take her seat. In protest, Guiterrez allies Kevin Northcraft and Mike Jamaica did not participate, leaving the board without a quorum and canceling the meeting.

Hours before the next scheduled meeting, Wilbourn resigned and HCCA ally Richard Torrez failed to show up. HCCA officials posted a notice canceling the meeting, citing lack of a quorum and locked the meeting room door.

Since then Northcraft, Jamaica and Gutierrez have held both public and closed session meetings with agendas and lawyers present. HCCA has refused to participate, saying they are illegal.

The next meeting would be Sept. 27.

Political chaos fall out

Fitch had reduced the rating on the bonds from BB (“speculative”) to B (“highly speculative”) on Aug. 9.

Its ratings report then focused largely on the hospital’s cash crunch, specifically it having only 18 days of cash on hand on March 31 and less on June 30.

There was no mention of political instability, but the report said it expected what it called a $22 million working capital loan to close the week of Aug. 14. Benzeevi did not respond to a question from the Advance-Register/Times-Delta about whether the loan had been obtained.

The June resolution the board adopted authorizing seeking the loan gave Benzeevi “absolute, full and complete power and authority to execute and deliver to the lender any and all documents and instruments required to obtain and consummate such loan and to take any further actions required to obtain and consummate such loan.”

Benzeevi declined to answer questions from the Advance-Register/Times-Delta about the August Fitch report. Instead, an HCCA lawyer, Marshall Grossman of Los Angeles, in a letter emailed to the newspapers Tuesday, sought to blame the hospital’s ratings cut on three board members elected since last November who have been critical of the HCCA management.

“Given their conduct, is it any wonder that a rating agency would lose confidence in the district and lower its bond rating?”

Asked in an interview with the Advance-Register/Times-Delta whether the political environment was a factor, Rebecca Meyer, Fitch’s primary analyst assigned to the TRMC rating, said it was a question she was “not comfortable” responding to.

The next day Fitch issued the second report with Meyer listed as a primary analyst.

Benzeevi had not responded by Friday evening to questions about the September 6 Fitch report.

The questions addressed to Benzeevi and a letter from Grossman are at the end of this story.

Rating services like Fitch and Moody are used by investors to monitor the creditworthiness of bonds. The rating companies base their rating information from public sources and interview key people at the agencies issuing the bonds.

In the Aug. 9 report, Fitch also said:

Declining patient admissions and what it called “low patient satisfaction” are eroding the profitability that HCCA brought to the hospital in 2015 and 2016. It noted “out-migration trends,” the growing tendency of patients who live in the Tulare area to use hospitals elsewhere.

TRMC’s debt collection has lagged in the last year. The time it takes TRMC to collect debts is approaching 120 days, Fitch said. At mid-year 2016, it was taking 53 days. Fitch said the median for hospitals like TRMC with “B” credit ratings is 48 days.

It noted TRMC’s 2016 audit was issued late and the auditors discovered “material financial reporting weaknesses.” It noted that TRMC promised to correct the problems but warned: “If left unaddressed the financial reporting weaknesses would cast doubt on the reliability of future financial statements.”

Rating agencies

Bond ratings by Fitch and Moody’s Investors Service have generally been friendly to HCCA since it took over management of the hospital in early 2014. Benzeevi has regularly cited them as he touted the hospital’s improved financial position.

They have applauded HCCA’s management for improved financial operations, but the failure last August of the $55 million bond issue to finish the tower have rattled the reviews.

Moody retained its Baa3 rating on TRMC’s general obligation bonds and revised its outlook from negative to stable in an opinion last October, noting that the failure of the bond vote represented a “challenge.” It noted also that general obligation bonds, unlike revenue bonds, are backed by property tax collections over which hospital operations have no impact.

In February, Fitch maintained is “BB-” rating on the revenue bonds but changed the outlook from positive to negative, citing the failure of the bond issue.

Moody vice president Helen Cregger told the Advance-Register/Times-Delta she hopes to update the company’s rating of the TRMC general obligation bonds by the end of the month.

State’s role

Hospitals and other health facilities, private and public, are required to file extensive quarterly and annual reports on their financial position with the health department’s Office of State Healthcare Planning and Development. Spokesman David Byrnes says his agency’s role is to ensure that hospital file reports accurately and on time.

For example, he said, quarterly reports are due 45 days after the end of the quarter. TRMC did not meet that deadline for the quarter ended June 30 and sought an extension. The report is now due Sept. 13.

Byrnes said any analysis or monitoring is limited to trend reports that don’t deal with individual facilities.

Tower financing

The Fitch report said TRMC expects to issue bonds by the end of the year, underwritten either by a federal or state program, to complete the tower. But what impact a dramatic cut (three levels) of TRMC’s credit rating would have on obtaining financing could not be determined.

The board voted 3-2 on March 22 to authorize Benzeevi to seek, execute and consummate a $79 million loan backed either by federal or state mortgage insurance but also unspecified “alternative financing.”

The resolution the board adopted did not require that the board approve the terms of whatever loan Benzeevi arranged.

TRMC chief finance officer Alan Germany had submitted an application a year ago for a $55 million loan underwritten by the Cal-Mortgage program operated by the Office of State Healthcare Planning and Development, but the application was stalled because the hospital didn’t provide all of the required documents. Among those missing was Benzeevi’s resume.

OSHPD spokesman Byrnes said this week that the last time Cal-Mortgage heard from TRMC was in February.

On the other hand, Howard Rosenberg, FOIA specialist at the federal Housing and Urban Development Department, said many documents had been filed by a consultant hired by HCCA and that they were being reviewed to determine what were releasable under a Freedom of Information Act request filed by the Advance-Register/Times-Delta. The official said TRMC had raised a “slew of objections” to releasing the documents.

Cash issues

The August Fitch report issued did not contain a days-cash-on-hand figure for June 30, but the hospital’s quarterly balance sheets reported that end-of-quarter cash had dropped from $3.7 million on March 31 to just over $2 million on June 30.

Day’s cash on hand is a standard measure of financial performance in the hospital industry. TRMC used to report it publicly every month but since HCCA took over management the figure is available only to bondholders and to ratings agencies like Fitch on a quarterly basis.

Basically, it’s a measure of the number of days a hospital could continue to pay its bills, including its payroll if it received no new revenue. It’s important for hospitals because most of their revenue comes from insurance sources – government and private – that are often delayed.

Fitch suggests a benchmark of 85.9 days of cash on hand for hospitals like TRMC with “B” credit ratings.

In September for TRMC it was 34.02, in December 45.16, according to documents the hospital prepared for bondholders.

Days cash on hand had been as high as 90 days, most recently in July 2015, according to the bondholder documents, but by the following June, it had dropped to 61 days.

By comparison, Kaweah Delta Medical Center averaged 147 days cash on hand during a 10-month period from July 2016 through April 2017.

The TRMC budget for 2017 forecast 100 days’ cash on hand at the end of the year.

Patient counts

Statistics maintained by the Office of State Healthcare Planning and Development show that in 2010, 48 percent of hospitalized Tulare patients were at TRMC, but by 2016 it had dropped by more than half to 23 percent.

Most of those patients appear to be going to Kaweah Delta Medical Center in Visalia, which now has 51 percent of hospitalized Tulare patients, up from 31 percent in 2010.

However, Meyer, the Fitch analyst, said in an interview that hospital management told her that “much of the patient and physician dissatisfaction originates with the physician limitations at the current hospital site.”

Fitch said unspecified “operational improvements” and completion of the long-stalled tower project would stem the trend of patients going elsewhere.

The report cited among other reasons “low patient satisfaction” for the decline in hospital use. In the interview, Meyer cited a patient experience survey by the Centers for Medicare and Medicaid Services. It showed TRMC with consistently low ratings on questions dealing with getting help when they needed it, pain control, room cleanliness and other patient issues.

Ratings for TRMC were consistently lower than those for Kaweah Delta and Adventist Medical Center in Hanford. On whether they would give the hospital a top rating and they would recommend it to friends and family, TRMC was 15-20 percent below Kaweah Delta and Adventist.

Loans from HCCA to TRMC

Meanwhile, documents obtained by the Advance-Register/Times-Delta via a California Public Records Request show that TRMC has been unable to meet HCCA ‘s “requests for payment” on 14 occasions since July 31, 2015, requiring the hospital to execute notes totaling almost $14 million.

The notes are for seven days. They bear no interest if repaid on time. If not, they carry 10 percent interest.

There was no indication in the records TRMC provided of how much had been repaid, and Benzeevi did not respond to questions about how much of the debt had been repaid.

The Advance-Register/Times-Delta sent TRMC public records requests for records of loans from HCCA to TRMC after Benzeevi referred to them at a board meeting June 20.

The request was sent June 27. After several delays, TRMC on August 21 sent records of 14 requests for payment from HCCA to TRMC and promissory notes for the same amount and date containing only Benzeevi’s initials.

Questions for Benzeevi on Fitch report Aug. 9:

Report cites $22 million loan was expected to close the week of August 14. Did it? It also said that failure to restore liquidity by the end of August would result in “further negative rating action.” What was DCOH at the end of August?

Why is HCCA no longer including DCOH in the financial reports it issues to the public?

What is HCCA doing to stem declines in liquidity?

Report cites “low patient satisfaction” as a threat to future profitability. It also refers to an “outmigration trend.” Are they referring to any kind of patient satisfaction survey HCCA may have taken? Or are they saying that dissatisfied patients aren’t coming back? If not, on what do you think they base their observation of “low patient satisfaction?” In the past, you have blamed patient census declines on the doctors. Do you think it’s the doctors or dissatisfied patients?

The issue of “timely and quality information.” They seem to be saying they aren’t getting it. What does that stem from? They also cite the lateness of the 2016 audit and its material weakness findings. Your audit response said those weaknesses were being corrected. Have they been? And have you contracted with an auditor to conduct the 2017 audit? If so, who?

The report seems to suggest that a change in the financial structure of the relationship between HCCA and TRMC could negatively affect TRMC’s cash flow and liquidity and could be a “credit negative.” Do you have any comment on that?

Questions for Benzeevi on Fitch report Sept. 6.

Do you have any comment on the Sept 6 Fitch bond rating?

I'd appreciate whatever you gave to say and specifically these issues:

Is the immediate liquidity issue that by not meeting, the board was unable to execute the $22 million loan? How does that square with resolution 852 which granted you sole authority to execute the loan?

What steps are being taken to resolve the board issue?

Do you expect a resolution by the end of Sept to forestall a further cut in the credit rating?

How close is TRMC to default?

What impact does a reduced credit rating have on your ability to secure financing to finish the tower?